The experts preach the message of building a nest egg as early as possible. By putting money into different vehicles, such as exchange traded funds (ETFs), as soon as you receive your first paycheck, they say you can reap the benefits of compounding interest. But what gets buried in the larger message is that you can’t simply put money into a retirement fund and expect to earn the long-term average.
According to Sam Mamudi of MarketWatch, luck plays a big part in how much your investment can grow. Take recent history for example: If you began stashing a percentage of your paycheck into the market in 2008, you would have lost close to 40% of your investment, assuming that your portfolio was based off a broad market index. [5 Tips for Portfolio Diversification.]
What if you started saving during non-recessionary times? A $100,000 portfolio of 60% stocks and 40% bonds invested in 1946 would have grown to about $1.15 million by 1976. From 1976 to 2006, that same amount would have grown to $2.27 million.
Looking at overlapping periods, that same portfolio invested in 1925 would have yielded about $1 million 30 years later, while the same portfolio invested two years later would have yielded only $760,000 by 1957, underscoring the fact that you can’t take the long-term growth average for granted.
Of course, there are no clear-cut answers to investing success. The best way to securing a retirement still starts with saving as early as possible to ensure that you save as much as possible.
One way to manage risk, limit losses and take part in possible long-term uptrends is to tactically manage your portfolio with a simple buy and sell strategy. This is going to be more important in the coming decades; the markets have become increasingly more volatile, making the old standard of buy-and-hold riskier than it used to be. [All You Need to Know About Moving Averages.]
The strategy we follow is the 200-day moving average. When an ETF falls below its 200-day EMA, we sell. When it rises above its 200-day EMA, we buy. You can find more details here. You can also find more detail in The ETF Trend Following Playbook.
For more stories on ETFs, visit our ETF 101 category.
Sumin Kim contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.